The SDR: Giving An Old Idea New Life

The IMF's Special Drawing Right, or SDR, was created more than 50 years ago and used only by IMF member countries to supplement their official reserves. The SDR’s value is based on a basket of five major currencies—the US dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound. In this podcast, Mohamed El-Erian, Chief Economic Advisor at the financial services firm Allianz, and a former deputy director at the IMF, says an expanded use of the SDR in global markets could help to strengthen the world economy.

“The renewed interest in the SDR is not by accident—it happened after the 2008 global financial crisis that almost tipped the world into a multi-year depression.”

El-Erian names three functions of the SDR that markets could embrace: The traditional, or official role as a currency that helps transfers between central banks; the market role, where the SDR becomes more prominent in the marketplace—thereby reducing diversification challenges; and the SDR as a unit of account that would limit the volatility associated with being linked to a single currency.

“Increasingly, multilateral corporations have moved away from trading single stocks to trading baskets of stocks,” he says. “From the buyer’s perspective it’s very clear—if liabilities are in multiple currencies, part of the risk mitigation is to be diversified, and the SDR would be a less costly way of doing it. On the issuer’s side, if your sources of revenues are international and not reliant on a single country, it makes sense to issue in a currency that’s more international.”

El-Erian says the IMF could potentially better position the SDR as a financial instrument for use by both public and private sectors by encouraging the development of the market infrastructure rather than trying to drive the change from the top.

“So, what it would mean is a mindset evolution," he notes. "And the IMF has done this in the past.”

And as the IMF's approach evolves, El-Erian believes, so too will the idea of broadening the role of the SDR in the International Monetary System.